We’re seeing the biggest threats to the economic expansion in years

Originally published August 14, 2018 at 1:02 pm
Updated August 15, 2018 at 6:33 am

An oversized copy of a 200 Turkish lira banknote, featuring a photo of modern Turkey’s founder, Mustafa Kemal Ataturk, decorates a currency exchange shop in Istanbul on Monday. The Turkish lira’s recent nosedive is the latest signal of uncertainty about the economic outlook. (Lefteris Pitarakis / The Associated Press)

The conventional wisdom sees decent growth this year. But several black swans are gathering that might trip up the optimists.

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Market turmoil spreading from Turkey, a low-grade corporate bond bubble, slowing housing market, inexperienced Fed… Throw in a trade war, and we have the biggest threat to the expansion in years.

The worst may not happen. Gross domestic product is forecast to grow a healthy 3.1 percent this year, according to the Congressional Budget Office. But that outlook was recently cut from 3.3 percent in April. And even with this optimistic look, growth would tail off in 2019.

Turkey is only the 21st largest export destination for Washington companies, worth $834 million last year out of $76.4 billion total. But the Turkish economic crisis carries far more risk than these numbers imply.

The Turkish lira, which has lost more than 40 percent of its value this year, is a canary in the coal mine for other developing countries. Currencies in nations from India to Argentina and Mexico have been affected.

The interconnected world, where financial viruses can spread quickly, hasn’t changed since it transmitted the Great Recession a decade ago. We also have the cautionary tale of the Asian financial crisis of 1997-98, where a worldwide crisis was avoided only by the work of American policymakers whose stature and abilities are absent in Washington, D.C. today.

Indeed, President Donald Trump has made Turkey’s troubles worse with his typical temperamental bipolarity.

He admires Turkish President Recep Tayyip Erdoğan, as he does all authoritarians. But last week he doubled tariffs on steel and aluminum imports from Turkey. (The administration also sanctioned two Turkish cabinet members in a dispute over Ankara detaining an evangelical pastor from North Carolina).

The Turkish leader, in turn, is threatening to block all imports from American technology companies.

Closer to home, the expansion faces the risk of a bubble in so-called leveraged lending, which is securitized and sold on Wall Street. These loans are made to businesses already deeply in debt, and the securities pay off more as interest rates rise.

What could go wrong? Rising interest rates could make it harder for the companies to service their debt and potentially cause them to default. The whole scheme goes poof. It’s no housing collapse, but it is an unexpected strain on the system.

The overall corporate debt picture is cautionary. While many large companies have strong balance sheets, others have taken on a lot of debt amid the expansion and improving profit margins. A cautionary blog post from the International Monetary Fund says, “Some investors assume the good times will never end.”

In the hottest markets (Seattle chief among them), a breather is normal and welcome. But a broad slowdown could bring bad tidings. For example, in many places construction employment has yet to return to its levels from the 2000s. This is especially true in residential building.

National housing starts, a leading economic indicator, dropped slightly in June, the most recent month for which data are available. New housing is going up at a rate well below the trend line for this point in an expansion.

Amid these many knife edges, we have one of the most inexperienced boards of governors for the Federal Reserve in memory.

Janet Yellen, a distinguished economist who helped steer the central bank through the Great Recession and became Fed chair in 2014, was replaced by Trump.

In her place, he named Jay Powell as chairman. A lawyer, investment banker and private equity player, Powell was named to the Fed in 2011 by President Barack Obama (Powell is a Republican). He may be a perfectly nice man and even support continuity with the Bernanke-Yellen leadership. But he’s untested at best, especially in a crisis. And most post-World War II recessions were caused or exacerbated by Fed missteps.

If all this isn’t enough, we face another war of choice that threatens to become a war without end.

In this case, it’s a trade war. Contrary to the president’s assertion, these are not good or easy to win. This is particularly true when they both alienate allies and take the wrong approach to China, whose resentment toward the United States will only intensify.

Regular readers know the risk to our state, the nation’s most trade dependent/vulnerable. At best, American customers will pay more and the drag on companies will dampen hiring. That’s the best outcome.

Put it all together, and the lights are flashing caution.

Economy Notes:

• The Economist Intelligence Unit recently released its Global Liveability Index. Seattle ranked 46 worldwide, but only No. 12 in the Americas. Calgary and Vancouver led that list. Melbourne was the world leader.

• Despite a roaring stock market, the purchasing power of Americans’ hourly wages is about the same as in 1978. This research from the Pew Research Center was written by former Seattle Times businesswriter Drew DeSilver.